Tax ruling ties for fourth in story ranking
by DAVID DAVIS, Managing Editor
Dec 28, 2012 | 1181 views | 0 0 comments | 6 6 recommendations | email to a friend | print
A ruling by three appellate court judges in Knoxville put an end to the long-running sales tax dispute between the city of Cleveland and Bradley County.

Newsroom editors and staff writers voted the ruling as No. 4 on the Top 10 list of Cleveland Daily Banner news articles for 2012 because of its long-term impact on city and county budgets and cooperation. The sales tax ruling actually shared the No. 4 spot with news coverage of the official launch of production in the new Whirlpool Cleveland Division plant on Benton Pike.

Based on total points, the sales tax and Whirlpool stories tied in the newsroom staff vote.

Tennessee Court of Appeals, Eastern Division, Knoxville, heard oral arguments on Aug. 3 after the city appealed a ruling by Chancellor Jerri Bryant that left intact a 1967 tax-sharing agreement.

The justices did reverse Bradley County Chancellor Jerri Bryant on one of three questions by declaring the city is entitled to receive proceeds for the entire 2010 fiscal year, which began July 1, 2009, and ended June 30, 2010.

Bryant ruled earlier this year that the county could begin collecting its share of a 2009 sales tax on June 30, 2009. The Bradley County Trustee held $1.5 million in disputed funds until the ruling was handed down Oct 30. That money was transferred to the city. That part of the ruling also meant Bradley County Schools owed the city $1.422 in taxes for the same period. On Dec. 10, the City Council accepted the school district’s offer to repay $1.422 million over a period of 30 months beginning July 15.

Attorney James Logan, who represented the county, said Thursday it is ironic that the sales tax increase approved by voters owes its support to the public’s desire for more money for education.

“At the end of the litigation, Bradley County Schools will have some of the funds available it anticipated for the next two years. However, we should not forget that the city and county school systems will reap the benefits in the foreseeable future.”

About a month earlier on Nov. 13, the Council unanimously voted not to appeal to the Tennessee Supreme Court.

Cleveland Mayor Tom Rowland said before the vote, “Although I have not heard from every member of the Council on how they feel about the appeal, I would highly recommend we put this lawsuit to rest and the Council unanimously agree not to enter into an appeal in this lawsuit.”

The resolution written by At-Large Councilman Richard Banks stated in part that the appeals court issued a ruling settling all issues relating to the sales tax dispute between the two local governments. He said continuing working together on joint projects now and in the future is in the best interests of city and county residents.

Rowland said Thursday morning he believes the ruling put an end to the dispute.

“I don’t think it will ever come up again,” Rowland said. “There have been too many court rulings favoring the agreement.”

Bradley County Mayor D. Gary Davis said, "I am hopeful the sales tax issue between the city and county has been laid to rest. Our contract with the city has been upheld by the State Appeals Court twice, so I feel the problem is now behind us and we can move forward in a spirit of community cooperation."

Justices Charles Susano Jr., D. Michael Swiney and John W. McClarty determined actions spoke louder than words in its decision handed down Oct. 30.

The court stated the city’s actions over a period of approximately 25 years confirmed its intent that a 1980 agreement controlled a sales tax increase in 1982. The opinion stated the city could have questioned the validity of the agreement at any time, but chose to do so only when the agreement became more beneficial to the county.

“We hold that by its actions in close proximity to the 1980 Amendment and the 1982 adoption by the County of a tax increase, and for approximately 25 years thereafter, the City has confirmed its intent that the Contract control distribution of the proceeds of the County’s 1982 tax increase,” Judge Susano wrote in a 17-page document on behalf of Judges Swiney and McClarty.

The justices stated the 1980 contract applied to the 1982 tax increase for a number of reasons. For one, the city admitted in chancery court that the 1980 Amendment made the 1967 contract applicable to the 1982 county tax increase.

“A party is not allowed to take one position in the trial court and then take a contrary position on appeal,” Susano wrote.

The appeals court decision was important because Bradley County stood to lose more than $3 million annually if the court nullified the revenue sharing formula between the two local governments. On the other hand, the city wanted the money because it will lose $1.8 million when the fire contract between the city and county fully expires June 30.

The appellate court decision was also important because Bradley County educates most of the students and, as directed by state mandate, the first half of local sales tax revenue is paid to schools. According to the local agreement, city schools get roughly one-third of the sales tax revenue and county schools get roughly two-thirds, based on average daily attendance.

According to state mandate, the remaining half is supposed to be distributed between cities and counties based upon the jurisdiction in which it was collected. The city generates roughly 88 percent of the sales in Bradley County since more retailers, services, restaurants and jobs are in the city.

However, the May 10, 1967, agreement directs roughly two-thirds of sales tax revenue to the city general fund and the remaining one-third to the county general fund.

The city tried to break the 1967 agreement in 1996, but Bradley County Chancellor Earl Henley left it in place. Both the city and the county appealed Henley’s decision to the Tennessee Court of Appeals, which upheld Henley’s opinion in a ruling handed down in April 1999.

Douglas Johnston Jr., Barrett Johnston L.L.C., of Nashville, represented the city in the latest suit. He asked the court to rule on three questioN s:

- Did the city and county amend the 1967 contract to extend its sales tax distribution formula to the 1982 local option sales tax increase? If not, the proceeds of the 1982 sales tax increase should be divided pursuant to Tennessee Code rather than the formula per the 1967 contract.

The court responded, “The judgment of the trial (chancery) court is affirmed in part and reversed in part. That part of the judgment upholding the validity of the Contract is affirmed as is that part of the judgment holding that the Contract controls distribution of the proceeds of the 1982 tax increase.”

- Is the 1967 contract void, voidable or terminable with reasonable notice as a perpetual contract?

Susano wrote, “We further held that the Contract contains a termination provision and is therefore not subject to attack as a perpetual contract. We also held, for two reasons, that the Contract was not against public policy for tying future City Council members to a contract that may not be in the City’s best interest during their future tenure.

“First, we held that the law in Tennessee clearly allows governing bodies of municipalities to enter into long-term contracts for the distribution of local option taxes. Second, we held that the City having received the benefit of its bargain in the early years of the Contract … is (now) obligated to honor its Contract with Bradley County during the period when Bradley County is receiving its benefit.”

- Is the city entitled to all proceeds of the 2009 tax increase collected within the city limits through June 30, 2010?

The justices ruled, “That part of the judgment holding that the City’s right under the 2009 tax county tax increase to the ‘same amounts’ it would have received under its own 2009 increase ended June 30, 2009, is reversed. The City is entitled to receive those proceeds for its 2010 fiscal year, which began July 1, 2009, and ended June 30, 2010.”

- The court allowed the city to withdraw a fourth question concerning the constitutionality of the county-only referendum.

The latest dispute over sales tax distribution began at a joint city and county work session Oct. 21, 2008, in which discussion concerning the need to fund capital projects and the possibility of a referendum allowing the voters to decide to raise the sales tax by .5 percent was raised.

The City Council approved an ordinance for a referendum on Nov. 24, 2008. County commissioners voted not to participate in a countywide referendum, a decision contrary to three previous occasions in 1967, 1972, and a failed referendum in 1980, which was presented again to voters and approved in 1982.

Cleveland voters approved increasing the city sales tax rate by .5 percent on March 10, 2009. The ballot referenced a city ordinance, which limited the funds for capital needs of the city and Cleveland City Schools.

After the referendum passed in the city, Bradley County commissioners changed their position on May 14, 2009, voting 9-5 to approve a referendum for voters residing outside the city. The referendum passed by county voters did not restrict the use of funds solely for capital needs.

Prior to June 1967, there was no local option sales tax in Bradley County. The agreement was amended when the sales tax was increased to 1.5 percent in 1972 and again in the early 1980s when the sales tax was increased to 2.25 percent. Both increases were approved by voters in countywide referendums.